QUEBECOR INC. AND ITS SUBSIDIARIES

Transcription

1 Consolidated financial statements of QUEBECOR INC. AND ITS SUBSIDIARIES

2 CONSOLIDATED FINANCIAL STATEMENTS Management s responsibility for financial statements Auditor s report to the shareholders of Quebecor Inc. Financial statements Consolidated statements of income... 1 Consolidated statements of comprehensive income (loss)... 2 Consolidated statements of shareholders equity... 3 Consolidated statements of cash flows... 4 Consolidated balance sheets... 6 Segmented information... 8 Notes to consolidated financial statements... 11

3 MANAGEMENT'S RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS The accompanying consolidated financial statements of Quebecor Inc. and its subsidiaries are the responsibility of management and have been approved by the Board of Directors of Quebecor Inc. These consolidated financial statements have been prepared by management in conformity with Canadian generally accepted accounting principles and include amounts that are based on best estimates and judgments. The management of the Company and of its subsidiaries, in furtherance of the integrity and objectivity of the data in the consolidated financial statements, has developed and maintains internal accounting control systems and supports a program of internal audit. Management believes that these internal accounting control systems provide reasonable assurance that financial records are reliable and form a proper basis for the preparation of the consolidated financial statements and that assets are properly accounted for and safeguarded, and that the preparation and presentation of other financial information are consistent with the consolidated financial statements. The Board of Directors carries out its responsibility for the financial statements principally through its Audit Committee, consisting solely of outside directors. The Audit Committee reviews the Company s annual consolidated financial statements and recommends their approval to the Board of Directors. The Audit Committee meets with the Company s management, internal auditors and external auditors to discuss internal controls over the financial reporting process, auditing matters and financial reporting issues, and formulates the appropriate recommendations to the Board of Directors. The auditor appointed by the shareholders has full access to the Audit Committee, with or without management being present. These consolidated financial statements have been audited by the auditor appointed by the shareholders and its report is presented hereafter. Pierre Karl Péladeau President and Chief Executive Officer Louis Morin Vice President and Chief Financial Officer Montréal, Canada February 24, 2009

4 AUDITORS REPORT TO THE SHAREHOLDERS OF QUEBECOR INC. We have audited the consolidated balance sheet of Quebecor Inc. and its subsidiaries as of December 31, 2008 and the consolidated statements of income, comprehensive income, shareholders equity and cash flows for the year ended December 31, These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of Quebecor Inc. and its subsidiaries as of December 31, 2008, and the results of their operations and their cash flows for the year ended December 31, 2008, in accordance with Canadian generally accepted accounting principles. The comparative information for 2007, prior to adjustments to reflect discontinued operations as described in note 2 to the financial statements, was audited by other auditors, who expressed an unqualified opinion on these statements in their report dated May 8, Chartered Accountants Montréal, Canada February 24, 2009 (1) CA auditor permit no. 9298

5 CONSOLIDATED STATEMENTS OF INCOME (in millions of Canadian dollars, except earnings per share data) Revenues $ 3,730.1 $ 3,365.9 Cost of sales and selling and administrative expenses 2, ,416.6 Amortization Financial expenses (note 3) Gain on valuation and translation of financial instruments (note 4) (17.8) (137.0) Restructuring of operations, impairment of assets and other special items (note 5) Loss on debt refinancing (note 6) 1.0 Impairment of goodwill and intangible assets (note 7) (Loss) income before income taxes and non-controlling interest (206.1) Income taxes (note 9) (346.0) Non-controlling interest (note 21) (160.3) (Loss) income from continuing operations (196.0) Income (loss) from discontinued operations (note 2) (1,241.8) Net income (loss) $ $ (969.2) Earnings per share (note 10) Basic From continuing operations $ (3.05) $ 4.24 From discontinued operations 5.96 (19.31) Net income (loss) 2.91 (15.07) Diluted From continuing operations $ (3.05) $ 4.19 From discontinued operations 5.96 (19.31) Net income (loss) 2.91 (15.12) Weighted average number of shares outstanding (in millions) Weighted average number of diluted shares (in millions) See accompanying notes to consolidated financial statements. 1

6 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in millions of Canadian dollars) Net income (loss) $ $ (969.2) Other comprehensive income (loss), net of income taxes and non-controlling interest (note 25): Unrealized gain (loss) on translation of net investments in foreign operations 3.1 (1.0) (Loss) gain on valuation of derivative financial instruments (35.3) 26.3 Other comprehensive loss from discontinued operations (124.8) Reclassification to income of other comprehensive loss related to discontinued operations (note 2) (96.1) Comprehensive income (loss) $ $ (1,065.3) See accompanying notes to consolidated financial statements. 2

7 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (in millions of Canadian dollars) Capital stock Retained earnings Accumulated other comprehensive income (loss) (note 24) Total shareholders equity Balance as of December 31, 2006 $ $ 1,385.9 $ (225.7) $ 1,506.8 Net loss (969.2) (969.2) Discontinued operations- Redemption of convertible notes Dividends (12.9) (12.9) Other comprehensive loss, net of income taxes and non-controlling interest (96.1) (96.1) Balance as of December 31, (321.8) Cumulative effect of changes in accounting policies (note 1(w)(i)) (20.6) (20.6) Net income Dividends (12.9) (12.9) Other comprehensive income, net of income taxes and non-controlling interest Balance as of December 31, 2008 $ $ $ (27.5) $ See accompanying notes to consolidated financial statements. 3

8 CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions of Canadian dollars) Cash flows related to operating activities (Loss) income from continuing operations $ (196.0) $ Adjustments for: Amortization of property, plant and equipment Amortization of intangible assets and deferred charges Gain on valuation and translation of financial instruments (note 4) (17.8) (137.0) Impairment of property, plant and equipment (note 5(a)) 19.1 Impairment of goodwill and intangible assets (note 7) Loss on debt refinancing (note 6) 1.0 Amortization of financing costs and long-term debt discount (note 3) Future income taxes (note 9) Non-controlling interest (150.0) Other (0.3) Net change in non-cash balances related to operating activities (27.5) 51.4 Cash flows provided by continuing operating activities Cash flows provided by discontinued operating activities Cash flows provided by operating activities Cash flows related to investing activities Acquisitions of property, plant and equipment (541.3) (492.8) Business acquisitions, net of cash and cash equivalents (note 8) (146.7) (438.6) Acquisitions of intangible assets (note 14) (567.1) (Increase) decrease in cash and cash equivalents in trust (0.1) 2.8 Other Cash flows used in continuing investing activities (1,253.1) (912.8) Cash flows used in discontinued investing activities and cash and cash equivalents of Quebecor World Inc. at date of deconsolidation (117.7) (230.7) Cash flows used in investing activities (1,370.8) (1,143.5) Cash flows related to financing activities Net decrease in bank indebtedness (4.6) (6.9) Net borrowings (repayments) under revolving and bridge bank facilities (105.8) Issuance of long-term debt, net of financing fees Repayments of long-term debt and unwinding of hedging contracts (25.7) (306.7) Repayment of the Additional Amount payable (note 17) (127.2) Dividends (12.9) (12.9) Dividends paid to non-controlling shareholders (32.4) (53.9) Other 2.6 (3.2) Cash flows provided by continuing financing activities Cash flows provided by discontinued financing activities Cash flows provided by financing activities Net (decrease) increase in cash and cash equivalents (57.9) Effect of exchange rate changes on cash and cash equivalents denominated in foreign currencies 1.4 (101.7) Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year $ 10.0 $

9 CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (in millions of Canadian dollars) Additional information on the consolidated statements of cash flows related to continuing operations Cash and cash equivalents at beginning of year $ 6.6 $ 13.9 Net increase (decrease) in cash and cash equivalents 2.0 (7.6) Effect of exchange rate changes on cash and cash equivalents denominated in foreign currencies Cash and cash equivalents at end of year $ 10.0 $ 6.6 Cash and cash equivalents consist of: Cash $ 10.0 $ 6.6 Cash equivalents $ 10.0 $ 6.6 Changes in non-cash balances related to operations (net of effect of business acquisitions and disposals): Accounts receivable $ 24.1 $ (47.8) Inventories and investments in televisual products and movies (26.0) (6.4) Accounts payable and accrued charges Stock-based compensation (114.0) 57.4 Other $ (27.5) $ 51.4 Cash interest payments $ $ Cash income taxes payments (net of refunds) 24.4 (1.2) See accompanying notes to consolidated financial statements. 5

10 CONSOLIDATED BALANCE SHEETS December 31, 2008 and 2007 (in millions of Canadian dollars) Assets Current assets Cash and cash equivalents $ 10.0 $ 6.6 Cash and cash equivalents in trust (note 19) Accounts receivable (note 11) Income taxes Inventories and investments in televisual products and movies (note 12) Prepaid expenses Future income taxes (note 9) Current assets related to discontinued operations (note 2) 1, ,437.2 Property, plant and equipment (note 13) 2, ,155.4 Future income taxes (note 9) Derivative financial instruments (note 28) Intangible assets (note 14) Other assets (note 15) Goodwill (note 16) 3, ,081.3 Long-term assets related to discontinued operations (note 2) 2,564.5 $ 8,058.7 $ 11,

11 CONSOLIDATED BALANCE SHEETS (continued) December 31, 2008 and 2007 (in millions of Canadian dollars) Liabilities and shareholders equity Current liabilities Bank indebtedness $ 12.3 $ 16.9 Accounts payable and accrued charges Deferred revenue Income taxes Current portion of long-term debt (note 18) Current liabilities related to discontinued operations (note 2) 2, , ,588.8 Long-term debt (note 18) 4, ,105.8 Exchangeable debentures (note 19) Derivative financial instruments (note 28) Other liabilities (note 20) Future income taxes (note 9) Non-controlling interest (note 21) ,263.7 Long-term liabilities and non-controlling interest related to discontinued operations (note 2) 2,244.8 Shareholders equity Capital stock (note 22) Retained earnings Accumulated other comprehensive loss (note 24) (27.5) (321.8) Commitments and contingencies (note 26) Guarantees (note 27) $ 8,058.7 $ 11,773.9 See accompanying notes to consolidated financial statements. On behalf of the Board of Directors, Jean Neveu, Chairman of the Board Jean La Couture, Director 7

12 SEGMENTED INFORMATION (in millions of Canadian dollars) Quebecor Inc. (the Company ) is a holding company with a 54.7% interest in Quebecor Media Inc., which is engaged, through its subsidiaries, in the following industry segments: Cable, Newspapers, Broadcasting, Leisure and Entertainment, and Interactive Technologies and Communications. The Cable segment offers television distribution, Internet, business solutions, telephony and wireless services in Canada and operates in the rental of digital video discs ( DVD units) and games. The Newspapers segment includes the printing, publishing and distribution of daily newspapers, weekly newspapers and directories in Canada and operates Internet sites in Canada, including French- and English-language portals and specialized sites. The Broadcasting segment operates French- and English-language general-interest television networks, specialized television networks, magazine publishing and movie distribution businesses in Canada. The Leisure and Entertainment segment combines book publishing and distribution, retail sales of CDs, books, videos, musical instruments and magazines in Canada, online sales of downloadable music and music production and distribution in Canada. The Interactive Technologies and Communications segment offers e-commerce solutions through a combination of strategies, technology integration, IP solutions and creativity on the Internet and is active in Canada, the United States, Europe and Asia. These segments are managed separately since they all require specific market strategies. The Company assesses the performance of each segment based on income from continuing operations before amortization, financial expenses, gain on valuation and translation of financial instruments, restructuring of operations, impairment of assets and other special items, loss on debt refinancing, impairment of goodwill and intangible assets, income taxes and non-controlling interest. During the fourth quarter of 2008, the reporting structure was changed to integrate the Newspapers and the Internet/Portals segments under the same reporting segment. Accordingly, prior period figures in the Company s segmented financial information were reclassified to reflect this change. The accounting policies of each segment are the same as the accounting policies used for the consolidated financial statements. Segment income includes income from sales to third parties and inter-segment sales. Transactions between segments are measured at exchange amounts between the parties. INDUSTRY SEGMENTS Revenues Cable $ 1,804.2 $ 1,552.6 Newspapers 1, ,073.9 Broadcasting Leisure and Entertainment Interactive Technologies and Communications Inter-segment (83.7) (87.9) $ 3,730.1 $ 3,

13 SEGMENTED INFORMATION (continued) (in millions of Canadian dollars) INDUSTRY SEGMENTS (continued) Income from continuing operations before amortization, financial expenses, gain on valuation and translation of financial instruments, restructuring of operations, impairment of assets and other special items, loss on debt refinancing, impairment of goodwill and intangible assets, income taxes and non-controlling interest Cable $ $ Newspapers Broadcasting Leisure and Entertainment Interactive Technologies and Communications Head Office 4.8 (15.4) $ 1,121.0 $ Amortization Cable $ $ Newspapers Broadcasting Leisure and Entertainment Interactive Technologies and Communications Head Office $ $

14 SEGMENTED INFORMATION (continued) (in millions of Canadian dollars) INDUSTRY SEGMENTS (continued) Additions to property, plant and equipment Cable $ $ Newspapers Broadcasting Leisure and Entertainment Interactive Technologies and Communications Head Office $ $ Assets related to continuing operations Cable $ 5,275.9 $ 4,460.1 Newspapers 1, ,426.8 Broadcasting Leisure and Entertainment Interactive Technologies and Communications Head Office $ 8,058.7 $ 7,

15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Quebecor Inc. is incorporated under the laws of Québec. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of presentation The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ( GAAP ) and include the accounts of Quebecor Inc. and its subsidiaries. Intercompany transactions and balances are eliminated on consolidation. Certain comparative figures for the year 2007 have been reclassified to conform to the presentation adopted for the year ended December 31, (b) Changes in accounting policies On January 1, 2008, the Company adopted Canadian Institute of Chartered Accountants ( CICA ) Section 3031, Inventories, which provides more extensive guidance on the recognition and measurement of inventories and related disclosures. The new accounting policy is described in note 1(l). On adoption of this new section, in accordance with the transition rules, the Company has adjusted opening retained earnings as if the new rules had always been applied in the past, without restating comparative figures for prior years. While the adoption of this new section impacted the Company s discontinued operations related to Quebecor World Inc. (note 1(w)(i)), it had no impact on the Company s continuing operations. On January 1, 2008, the Company adopted the CICA Section 1535, Capital Disclosures, Section 3862, Financial Instruments Disclosures, and Section 3863, Financial Instruments Presentation. These sections relate to disclosures and presentation of information and did not affect the consolidated financial results. All the disclosure requirements related to these new accounting standards are presented in note 28. (c) Changes in accounting estimates The Company estimates the fair value of its derivative financial instruments using a discounted cash flow valuation technique, since no quoted market prices exist for such instruments. In the second quarter of 2008, the Company made some amendments to the technique used in measuring the fair value of its derivatives in a liability position and in an asset position. These amendments change the way the Company factors counterparty and its own non-performance risk in its valuation technique, considering market development and recent accounting guidelines. The cumulative impact of these changes as of December 31, 2008 is a decrease of the fair value of these derivatives by $22.7 million, an increase of the gain on valuation and translation of financial instruments by $4.9 million, and a decrease of other comprehensive income by $27.6 million (before income taxes and non-controlling interest). (d) Foreign currency translation Financial statements of self-sustaining foreign operations are translated using the rate in effect at the balance sheet date for asset and liability items, and using the average exchange rates during the year for revenues and expenses. Adjustments arising from this translation are recorded in other comprehensive income and are reclassified in income only when a reduction in the investment in these foreign operations is realized. Foreign currency transactions are translated using the temporal method. Translation gains and losses are included in financial expenses or in gain or loss on valuation and translation of financial instruments, unless hedge accounting is used. 11

16 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (e) Use of estimates The preparation of consolidated financial statements in accordance with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, related amounts of revenues and expenses, and disclosure of contingent assets and liabilities. Significant areas requiring the use of management estimates relate to the determination of pension and postretirement benefit costs, key economic assumptions used in determining the allowance for doubtful accounts, the provision for obsolescence, the allowance for sales returns, legal contingencies, the costs for restructuring of operations, the useful life of assets for amortization and evaluation of expected future cash flows to be generated by those assets, the determination of the implied fair value of goodwill and the fair value of assets and liabilities for business purchase price allocation purposes and goodwill impairment test purposes, fair value of longlived assets for purposes of the impairment of long-lived assets, fair value of broadcasting licences and mastheads for impairment test purposes, provisions for income taxes and determination of future income tax assets and liabilities, and the determination of fair value of financial instruments and derivative instruments. Actual results could differ from these estimates. (f) Impairment of long-lived assets The Company reviews long-lived assets with definite useful lives whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. An impairment loss is recognized when the carrying amount of an asset or a group of assets held for use exceeds the sum of the undiscounted cash flows expected from its use and eventual disposition. Measurement of an impairment loss is based on the amount by which the carrying amount of a group of assets exceeds its fair value. Fair value is determined using quoted market prices, when available, or using accepted valuation techniques such as the discounted future cash flows method. (g) Revenue recognition The Company recognizes its operating revenues when the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the seller's price to the buyer is fixed or determinable; and the collection of the sale is reasonably assured. The portion of revenue that is unearned is recorded under Deferred revenue when customers are invoiced. Revenue recognition policies for each of the Company s main segments are as follows: Cable segment The Cable segment provides services under arrangements with multiple deliverables, for which there are two separate accounting units: one for subscriber services (cable television, Internet, IP telephony or wireless telephone, including connecting fees) and the other for equipment sales to subscribers. Components of multiple deliverable arrangements are separately accounted for, provided the delivered elements have stand-alone value to the customer and the fair value of any undelivered elements can be objectively and reliably determined. 12

17 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (g) Revenue recognition (continued) Cable segment (continued) Cable connection fee revenues of the Cable segment are deferred and recognized as revenues over the estimated average period that subscribers are expected to remain connected to the network. The incremental and direct costs related to cable connection fees, in an amount not exceeding the revenue, are deferred and recognized as an operating expense over the same period. The excess of these costs over the related revenues is recognized immediately in income. Operating revenues from cable and other services, such as Internet access, IP telephony and wireless telephone, are recognized when services are rendered. Revenues from equipment sales to subscribers and their costs are recognized in income when the equipment is delivered and, in the case of wireless phones, revenues from equipment sales are recognized when the phone is delivered and activated. Revenues from video rentals are recorded as revenue when services are provided. Promotion offers related to subscriber services are accounted for as a reduction in the related service revenue over the period of performance of the service contract. Promotion offers related to equipment, including wireless telephones, are accounted for as a reduction in the related equipment sales when the equipment is delivered. Operating revenues related to service contracts are recognized in income over the life of the specific contracts on a straight-line basis over the period in which the services are provided. Newspapers segment Revenues of the Newspapers segment derived from circulation and advertising are recognized when the publication is delivered, net of provisions for estimated returns based on the segment s historical rate of returns. Revenues from the distribution of publications and products are recognized upon delivery, net of provisions for estimated returns. Broadcasting segment Revenues of the Broadcasting segment, derived from the sale of advertising airtime, are recognized when the advertisement has been broadcast. Revenues derived from subscriptions to specialty television channels are recognized on a monthly basis at the time service is rendered. Revenues derived from circulation and advertising from publishing activities are recognized when the publication is delivered, net of provisions for estimated returns based on the segment s historical rate of returns. Revenues derived from the distribution of televisual products and movies and from television program rights are recognized when the customer can begin exploitation, exhibition or sale, and the licence period of the arrangement has begun. Theatrical revenues are recognized over the period of presentation and are based on a percentage of revenues generated by movie theatres. Revenues generated from the distribution of DVDs are recognized at the time of their delivery, less a provision for estimated returns, or are accounted for based on a percentage of retail sales. Leisure and Entertainment segment Revenues derived from retail stores, book publishing and distribution activities are recognized on delivery of the products, net of provisions for estimated returns based on the segment s historical rate of returns. (h) Barter transactions In the normal course of operations, the Newspapers and the Broadcasting segments offer advertising in exchange for goods and services. Revenues thus earned and expenses incurred are accounted for on the basis of the fair value of the goods and services obtained. For the year ended December 31, 2008, the Company recorded $19.2 million of barter advertising ($19.0 million in 2007). 13

18 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (i) Financial instruments Classification, recognition and measurement Financial instruments are classified as held-for-trading, available-for-sale, held-to-maturity, loans and receivables, or other financial liabilities, and measurement in subsequent periods depends on their classification. The Company has classified its cash and cash equivalents, cash and cash equivalents in trust and bank indebtedness as held-for-trading. Accounts receivable, loans and other long-term receivables included in other assets have been classified as loans and receivables. All portfolio investments included in other assets have been classified as available-for-sale, with the exception of the portfolio investment in AbitibiBowater Canada Inc., which has been designated as held-for-trading. All of the Company s financial liabilities have been classified as other liabilities, with the exception of the exchangeable debentures, which have been classified as held-for-trading. Financial instruments held-for-trading are measured at fair value with changes recognized in income as gain or loss on valuation and translation of financial instruments. Available-for-sale portfolio investments are measured at fair value or at cost in the case of equity investments that do not have a quoted market price in an active market. Changes in fair value are recorded in other comprehensive income. Financial assets classified as loans and receivables and other financial liabilities are measured at amortized cost, using the effective interest rate method of amortization. Financing fees related to long-term financing are capitalized in reduction of long-term debt and amortized using the effective interest rate method. Derivative financial instruments and hedge accounting The Company uses various derivative financial instruments to manage its exposure to fluctuations in foreign currency exchange rates and interest rates. The Company does not hold or use any derivative financial instruments for trading purposes. Under hedge accounting, the Company documents all hedging relationships between hedging items and hedged items, as well as its strategy for using hedges and its risk-management objective. It also designates its derivative financial instruments as either fair value hedges or cash flow hedges. The Company assesses the effectiveness of derivative financial instruments when the hedge is put in place and on an ongoing basis. The Company enters into the following types of derivative financial instruments: The Company uses foreign exchange forward contracts to hedge the foreign currency rate exposure on (i) anticipated equipment or inventory purchases in a foreign currency and (ii) principal payments on long-term debt in a foreign currency. These latest foreign exchange forward contracts are designated as cash flow hedges. The Company uses cross-currency interest rate swaps to hedge (i) the foreign currency rate exposure on interest and principal payments on foreign currency denominated debt and/or (ii) the fair value exposure on certain debt resulting from changes in interest rates. The cross-currency interest rate swaps that set all future interest and principal payments on U.S.-denominated debt in fixed Canadian dollars are designated as cash flow hedges. The Company s cross-currency interest rate swaps that set all future interest and principal payments on U.S.-denominated debt in fixed Canadian dollars, in addition to converting the interest rate from a fixed rate to a floating rate, or converting a floating rate index to another floating rate index, are designated as fair value hedges. The Company uses interest rate swaps to manage the fair value exposure on certain debt resulting from changes in interest rates. These swap agreements require a periodic exchange of payments without the exchange of the notional principal amount on which the payments are based. These interest rate swaps are designated as fair value hedges when they convert the interest rate from a fixed rate to a floating rate, or as cash flow hedges when they convert the interest rate from a floating rate to a fixed rate. 14

19 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (i) Financial instruments (continued) Derivative financial instruments and hedge accounting (continued) Under hedge accounting, the Company applies the following accounting policies: For derivative financial instruments designated as fair value hedges, changes in the fair value of the hedging derivative recorded in income are substantially offset by changes in the fair value of the hedged item to the extent that the hedging relationship is effective. When a fair value hedge is discontinued, the carrying value of the hedged item is no longer adjusted and the cumulative fair value adjustments to the carrying value of the hedged item are amortized to income over the remaining term of the original hedging relationship. For derivative financial instruments designated as cash flow hedges, the effective portion of a hedge is reported in other comprehensive income until it is recognized in income during the same period in which the hedged item affects income, while the ineffective portion is immediately recognized in the consolidated statements of income. When a cash flow hedge is discontinued, the amounts previously recognized in accumulated other comprehensive income are reclassified to income when the variability in the cash flows of the hedged item affects income. Any change in the fair value of these derivative financial instruments recorded in income is included in gain or loss on valuation and translation of financial instruments. Interest expense on hedged long-term debt is reported at the hedged interest and foreign currency rates. Derivative financial instruments that are ineffective or that are not designated as hedges, including derivatives that are embedded in financial or non-financial contracts that are not closely related to the host contracts, are reported on a mark-to-market basis in the consolidated balance sheets. Any change in the fair value of these derivative financial instruments is recorded in the consolidated statements of income as gain or loss on valuation and translation of financial instruments. (j) Cash and cash equivalents Cash and cash equivalents include highly liquid investments purchased three months or less from maturity and are recorded at fair value. As of December 31, 2008, these highly liquid investments consisted mainly of Bankers acceptances. (k) Tax credits and government assistance The Broadcasting and the Leisure and Entertainment segments have access to several government programs designed to support production and distribution of televisual products and movies, as well as music products, magazine and book publishing in Canada. The financial assistance for production is accounted for as a reduction in expenses. The financial assistance for broadcast rights is applied against investments in televisual products or used directly to reduce operating expenses during the year. The financial assistance for magazine and book publishing is accounted for in revenues when the conditions of the government programs are met. The Interactive Technologies and Communications and the Leisure and Entertainment segments receive tax credits mainly related to their research and development activities and publishing activities. These tax credits are accounted for as a reduction in related costs, whether they are capitalized or expensed, in the year the expenses are incurred, as long as there is reasonable assurance of their realization. 15

20 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (l) Inventories Inventories are valued at the lower of cost, determined by the first-in, first-out method, or the weighted average cost method, and net realizable value. Net realizable value represents the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. Work in progress is valued at the pro-rata billing value of the work completed. (m) Investments in televisual products and movies (i) Programs produced and productions in progress Programs produced and productions in progress related to broadcasting activities are accounted for at the lower of cost and net realizable value. Cost includes direct charges for goods and services and the share of labour and general expenses related to each production. The cost of each program is charged to cost of sales when the program is broadcast. (ii) Broadcast rights Broadcast rights are essentially contractual rights allowing the limited or unlimited broadcast of televisual products or movies. The Broadcasting segment records the broadcast rights acquired as an asset and the obligations incurred under a licence agreement as a liability when the broadcast licence period begins and all of the following conditions have been met: (a) the cost of each program, movies or series is known or can be reasonably determined; (b) the programs, movies or series have been accepted in accordance with the conditions of the broadcast licence agreement; (c) the programs, movies or series are available for first showing or telecast. Amounts paid for broadcast rights before all of the above conditions are met are recorded as prepaid broadcast rights. Broadcast rights are classified as short or long term, based on management's estimate of the broadcast period. These rights are amortized when televisual products and movies are broadcast over the contract period, using an amortization method based on future revenues and the estimated number of showings. This amortization is recorded in cost of sales and selling and administrative expenses. Broadcast rights are valued at the lower of unamortized cost or net realizable value. Broadcast rights payable are classified as current or long-term liabilities based on the payment terms included in the licence. (iii) Distribution rights Distribution rights relate to the distribution of televisual products and movies. Costs include distribution rights for televisual products and movies and other operating costs incurred that generate future economic benefits. The net realizable value of distribution rights represents the Broadcasting segment s share of the future estimated revenues to be derived, net of future costs. The Broadcasting segment records an asset and a liability for the distribution rights and obligations incurred under a licence agreement when (a) the cost of the licence is known or can be reasonably estimated, (b) the televisual product and movie has been accepted in accordance with the conditions of the licence agreement, and (c) the televisual product or movie is available for distribution. Amounts paid for distribution rights before all of the above conditions are met are recorded as prepaid distribution rights. Distribution rights are amortized using the individual film forecast computation method based on actual revenues realized over total expected revenues. Estimates of revenues related to the distribution of television products and movies are examined periodically by Broadcasting segment management and revised as necessary. The value of unamortized costs is reduced to net realizable value, as necessary, based on this assessment. The amortization of distribution rights is recorded in cost of sales and selling and administrative expenses. 16

21 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (n) Income taxes The Company uses the liability method of accounting for income taxes. Under this method, future income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities in the financial statements and their respective tax bases. Future income tax assets and liabilities are measured using substantively enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on future income tax assets and liabilities is recognized in income in the period that includes the substantive enactment date. A valuation allowance is established, if necessary, to reduce any future income tax asset to an amount that is more likely than not to be realized. In the course of the Company s operations, there are a number of uncertain tax positions due to the complexity of certain transactions and due to the fact that related tax interpretations and legislation are continually changing. When a tax position is uncertain, the Company recognizes an income tax benefit or reduces an income tax liability only when it is probable that the tax benefit will be realized in the future or that the income tax liability is no longer probable. (o) Long-term investments Investments in companies subject to significant influence are accounted for by the equity method. All portfolio investments are classified as available-for-sale, with the exception of the portfolio investment in AbitibiBowater Canada Inc., which is classified as held-for-trading and is accounted for as described in note 1(i). Carrying values of investments are reduced to estimated fair values if there is other than a temporary decline in the value of the investment. (p) Property, plant and equipment Property, plant and equipment are stated at cost, net of government grants and investment tax credits. Cost represents acquisition or construction costs, including preparation, installation and testing costs and interest incurred with respect to the property, plant and equipment until they are ready for commercial production. In the case of projects to construct and connect receiving and distribution networks of cable and wireless, the cost includes equipment, direct labour and direct overhead costs. Projects under development may also include advances for equipment under construction. Expenditures for additions, improvements and replacements are capitalized, whereas maintenance and repair expenditures are expensed as incurred. Amortization is principally calculated on a straight-line basis over the following estimated useful lives: Assets Buildings Machinery and equipment Receiving, distribution and telecommunication networks Estimated useful life 25 to 40 years 3 to 20 years 3 to 20 years Leasehold improvements are amortized over the term of the lease. The Company does not record an asset retirement obligation in connection with its cable distribution networks. The Company expects to renew all of its agreements with utility companies to access their support structures in the future, making the retirement date undeterminable for these assets. 17

22 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (q) Goodwill and other intangible assets Goodwill and intangible assets with indefinite useful lives are not amortized. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test is carried out in two steps. In the first step, the carrying amount of the reporting unit is compared to its fair value. When the fair value of a reporting unit exceeds its carrying amount, then the goodwill of the reporting unit is considered not to be impaired and the second step is not required. The second step of the impairment test is carried out when the carrying amount of a reporting unit exceeds its fair value, in which case the implied fair value of the reporting unit's goodwill is compared to its carrying amount to measure the amount of the impairment loss, if any. When the carrying amount of the reporting unit's goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess. Intangible assets acquired, such as broadcasting licences and mastheads that have an indefinite useful life, are also tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test compares the carrying amount of the intangible asset to its fair value, and an impairment loss is recognized in the consolidated statements of income for the excess, if any. The cost of the spectrum licences for Advanced Wireless Services ( AWS ) includes acquisition costs and interest incurred during the development period of the wireless network project, until the network is ready for commercial service. Other intangible assets with definite useful lives, such as customer relationships and non-competition agreements, are amortized over their useful life using the straight-line method over a 3 to 10-year period. (r) Exchangeable debentures The carrying amount of the exchangeable debentures is based on the market price, at the balance sheet date, of the underlying 12.5 million Subordinate Shares of Quebecor World Inc. and the 2.8 million Common Shares of AbitibiBowater Canada Inc. (the underlying shares ) that would have satisfied the debentures liability had the Company elected to settle the debentures with the underlying shares as of December 31, At maturity, each exchangeable debenture is exchangeable for the underlying shares based on a fixed conversion factor, determined at the date the debentures were issued. The Company has the option of delivering shares, cash equivalents based on the market price of the underlying shares at the time of exchange, or a combination of cash and shares. The Company does not use hedge accounting to account for exchangeable debentures, Series Abitibi, or the portfolio investment in AbitibiBowater Canada Inc. Changes in the fair value of these financial instruments, designated as held-for-trading, are offset concurrently in income. Changes in the fair value of exchangeable debentures, Series 2001, are recorded directly in the consolidated statements of income since these debentures are classified as held-for-trading. (s) Stock-based compensation The compensation cost attributable to stock-based awards to employees that call for settlement in cash or other assets at the option of the employee is recognized in operating expenses over the vesting period. Changes in the intrinsic value of the stock option awards between the grant date and the measurement date result in a change in the liability and compensation cost. The deferred stock unit ( DSU ) plan of the Company is recognized as a compensation expense and accrued as liabilities as DSUs are awarded. The DSUs are re-measured at each reporting period until settlement, using the share trading price of the Company and its subsidiaries. 18

23 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (t) Pension plans and postretirement benefits (i) Pension plans The Company offers defined benefit pension plans and defined contribution pension plans to some of its employees. Defined benefit pension plan costs are determined using actuarial methods and are funded through contributions determined in accordance with the projected benefit method pro rated on service, which incorporates management s best estimate of future salary levels, other cost escalations, retirement ages of employees and other actuarial factors. Pension plan expense is charged to operations and includes: Cost of pension plan benefits provided in exchange for employee services rendered during the year. Amortization of the initial net transition asset, prior service costs and amendments on a straight-line basis over the expected average remaining service period of the active employee group covered by the plans. Interest cost of pension plan obligations, expected return on pension fund assets, and amortization of cumulative unrecognized net actuarial gains and losses, in excess of 10.0% of the greater of the accrued benefit obligation, or the fair value of plan assets, over the expected average remaining 13-year service period of the active employee group covered by the plans. When an event gives rise to both a curtailment and a settlement, the curtailment is accounted for prior to the settlement. Actuarial gains and losses arise from the difference between the actual rate of return on plan assets for a period and the expected rate of return on plan assets for that period, or from changes in actuarial assumptions used to determine the accrued benefit obligation. The Company uses the fair value of plan assets as of the end of the year to evaluate plan assets for the purpose of calculating the expected return on plan assets. (ii) Postretirement benefits The Company offers health, life and dental insurance plans to some of its retired employees. The cost of postretirement benefits is determined using actuarial methods and the related benefits are funded by the Company as they become due. The Company amortizes the cumulative unrecognized net actuarial gains and losses, in excess of 10.0% of the accrued benefit obligation, over the expected average remaining service life of the active employee group covered by the plans. (u) Rates subject to CRTC regulation The Cable segment s operations are subject to rate regulations on certain services based on geographical regions, mainly by the Broadcasting Act (Canada) and the Telecommunications Act (Canada), both managed by the Canadian Radio-television and Telecommunication Commission ( CRTC ). Accordingly, the Cable segment s operating revenues could be affected by changes in regulations or decisions made by this regulating body. The Company does not select accounting policies that differ from GAAP, even though the Company is subject to these regulations. 19

24 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (v) Future changes in accounting standards In January 2008, the CICA issued Section 3064, Goodwill and Intangible Assets, which will replace Section 3062, Goodwill and Other Intangible Assets, and which results in the withdrawal of Section 3450, Research and Development Costs and Emerging Issues Committee ( EIC ) Abstract 27, Revenues and Expenditures During the Pre-operating Period, and amendments to Accounting Guideline ( AcG ) 11, Enterprises in the Development Stage. The new standard provides guidance on the recognition of intangible assets in accordance with the definition of an asset and the criteria for asset recognition, as well as clarifying the application of the concept of matching revenues and expenses, whether those assets are separately acquired or internally developed. This standard applies to interim and annual financial statements relating to fiscal years beginning on or after October 1, The Company is currently evaluating the effects of adopting this standard, although it does not expect the adoption will have a material impact on its consolidated financial statements. (w) Accounting policies of Quebecor World Inc. Discontinued operations The following principal accounting policies were specific to Quebecor World Inc. s operations which were consolidated in the Company s financial statements until January 21, 2008 (note 2): (i) Changes in accounting policies Following the adoption of Section 3031, Inventories, the following adjustments were recorded in the consolidated financial statements as of January 1, 2008: $32.2 million decrease in inventories. $7.0 million increase in property, plant and equipment. $4.6 million decrease in future income tax liabilities. $20.6 million decrease in retained earnings. No portion of the adjustment on retained earnings was allocated to non-controlling shareholders of Common Shares of Quebecor World Inc. since their investment was reduced to zero in the consolidated balance sheet as of December 31, 2007, in accordance with Canadian GAAP. (ii) Revenue recognition Quebecor World Inc. offered its customers a wide variety of print and print-related services, which usually required that the specifics be agreed upon prior to undertaking the process. Substantially all of Quebecor World Inc. s revenues were derived from commercial printing and related services under the magazine, retail, catalog, book and directory platforms. Contract revenue was recognized using the proportional performance method on the basis of output at the pro-rata billing value of work completed. Contract revenues that did not meet the criteria for the proportional performance method were recorded when the agreed services were performed. Quebecor World Inc. also performed logistics and distribution services for the delivery of products related to print services for which the revenues were recognized once freight services were performed. Revenue was presented in the consolidated statements of income net of rebates, discounts, and amortization of contract acquisition costs. Provisions for estimated losses, if any, were recognized in the period in which the loss was determinable. 20